The Evolution of Utility-Offered “Organic” Electricity

Among the so-called winners and losers of the farm bill the U.S. Senate approved last Tuesday, and which the President signed on Friday, the organic food industry counted itself a winner. It’s the latest victory in organic food’s meteoric rise.

The State of Sustainability Initiatives Review 2014, released less than two weeks ago, examined market trends for voluntary sustainability standards across 10 key commodity sectors, including bananas, cocoa, coffee, sugar, soybeans, and tea. In 2012, sustainable commodities experienced astounding 41 percent average annual growth, compared to a paltry 2 percent for their equivalent conventional commodities. Moreover, once considered a niche market, such sustainable commodities are increasingly going mainstream. Sustainable coffee, for example, reached 38 percent market share of global production in 2012.

That growth in both production and market share is in part behind solid U.S. organic food sales numbers. According to the U.S. Department of Agriculture late last year, U.S. organic food sales reached $28 billion in 2012, up 11 percent from 2011. In fact, organic foods have experienced double-digit annual growth more or less without interruption for the past decade.

If, like me, you’re one of the millions of Americans making organic choices for at least some of your produce, then you’ve undoubtedly noted one commonality: the organic premium. You’re going to pay a bit more—and sometimes a lot more—for the organic version of an otherwise conventional food commodity like corn or apples or tomatoes.

How might these three organic food industry trends—a shift from niche to mainstream markets, growing consumer demand, and an omnipresent price premium—apply to the electricity sector? I recently wrote about the de-commoditization of the kilowatt-hour, comparing electricity from a utility to the produce aisle of the supermarket. But for me this brought up a new series of questions. Though I pointed to a future, coming soon if not here already for some, in which customers will increasingly demand utilities differentiate one kWh from another, how have some utilities already been offering retail customers the equivalent of “organic” electricity? And how might that landscape be changing?

Green Power Programs Offer “Organic” Electricity

For years and even decades, some utilities have offered voluntary, opt-in green power programs for customers that want to forego the grid’s generation mix in favor of sourcing their electricity from clean, renewable power. More or less without exception, from California to Colorado and beyond, customers pay a premium to participate in such programs, according to DOE’s EERE. You’ll pay anywhere from a fraction of a cent to five or more cents extra per kWh for organic electricity.

Just as with organic supermarket produce, green power programs remain a niche market, though green power is increasingly making inroads to mainstream markets. All the while, green power purchasing is experiencing annual growth that far exceeds conventional markets.

For example, Xcel’s popular Windsource program began all the way back in 1983 and last year sold its one-billionth kilowatt-hour. Today, the program includes about 73,000 residential customers, a relative drop in Xcel’s bucket. But over the last five years, commercial participation has grown an average 38 percent annually, easily outpacing Xcel’s overall annual growth rate of 11 percent. In 2012, businesses bought more than double the megawatt-hours of Windsource electricity they did in 2008, even as U.S. electricity consumption remained flat during that same time period, according to EIA. Translation: organic electricity made important inroads to the mainstream power market, thanks in part to utility-offered green power programs.

“Customer preferences are becoming much more nuanced and differentiated,” says RMI electricity principal Lena Hansen. It’s about more than blindly buying kilowatt-hours. “It started largely with the green thing,” she continues, citing one motivating factor for early adopters, “but what does the customer really want? We’re seeing an ongoing shift of preferences beyond green to green plus.”

If that pattern of affluent early adopters motivated by green attributes sounds familiar, it should: the success of Whole Foods first took root in affluent, environmentally progressive towns like Berkeley, CA, and Boulder, CO, but the company has successfully migrated to bring a broader demographic through its doors. So, too, has it gone with customer-owned and -leased rooftop solar, once considered a luxury for the climate-conscious well-to-do but increasingly the domain of the middle class, according to a 2013 report from the Center for American Progress, thanks to steep cost declines (in other words, reductions in the organic electricity premium).

Is Organic Electricity Becoming the Cheaper Option?

For customers that continue to get their organic electricity through their utility, though, is the trend toward cheaper prices that make green power more inclusive of a broader demographic also holding true?

“Green power programs always marketed renewables as more expensive,” says Hansen. “Increasingly that’s not the case. So what are people paying for? That’s an open question.”

Indeed, conventional wisdom once said that renewables cost more than other forms of electricity generation, and they were. But that has changed. Utility-scale wind and solar PV are beating natural gas and other fossil-fueled forms of generation unsubsidized, and not just in renewables-hungry countries like Germany. It’s happening here, too.

For example, an August 2013 U.S. Department of Energy report found 2012 average wholesale rates of $40/MWh for wind nationally and as low as $30/MWh in certain regions. Adding back in incentives such as the PTC would raise those numbers by about $20/MWh. Meanwhile, U.S. EIA data for that same year show wholesale electricity prices surpassing $50, $100, $150, and even $250 per MWh in certain regions at certain times over the course of the year. A 2013 report from financial advisory firm Lazard states the situation even more plainly: it shows an unsubsidized LCOE as low as $45/MWh for wind compared to $61 for the cheapest natural gas combined cycle generation.

More recently, earlier this year a Minnesota judge caught the power sector’s attention when he recommended the state public utilities commission favor new solar PV as the better deal compared to new natural gas. A recent study from Texas’s ERCOT came to a similar conclusion: that wind and solar are price-competitive with natural gas.

This is a noteworthy shift; the conventional wisdom no longer holds. Imagine if you could buy Whole Foods-quality organic, local fruits and vegetables for less than the budget produce at Super Target, Walmart, and Costco. It would appear that day is here…almost.

The Road to Affordable, Mainstream Organic Electricity For All

So will customers start to see the voluntary green power program per-kWh premiums go away, or even become negative, where green power programs cost less than standard retail-rate electricity?

Believe it or not, that has happened before. Nearly a decade ago, Xcel Windsource customers in Colorado found themselves paying less than standard retail rate customers. Though Windsource customers had opted in to a more expensive green power program, locking in those higher rates for a year, a surge in natural gas and coal prices caused retail electricity prices to climb, so that regular customers found themselves paying an average $69 per month (they paid about $53 per month before the increase), compared to $59 per month for Windsource customers.

That example not withstanding, there remain good reasons why green power programs may continue to command a price premium.

Just because renewables’ generation costs, as measured by LCOE, are competitive with central thermal generation doesn’t mean it’s time to abandon green power premiums. From wheeling charges to transmit Midwest wind power to population centers where it can be consumed, to incremental costs to add more utility-scale renewables to a grid that may already have enough generating capacity, to renewables integration and grid operation costs, there are myriad potential reasons why organic electricity premiums aren’t yet ready to go the way of the dodo.

Nevertheless, renewables’ continued cost declines and fossil fuels’ uncertain and volatile future foretell a coming time when the thing—organic electricity—for which a subset of idealistic customers once paid a premium will become the standard fare for the general population and the utilities that provide their power.

Until that day comes, green power programs remain a valued option for customers unable to use or uninterested in behind-the-meter distributed energy solutions. Just as the food justice movement concerns itself with making sure certain members of the community aren’t excluded from the option of buying affordable, quality, healthy, fresh produce—ensuring to some degree that the Whole Foods experience is accessible to all—so too do utility-offered green power programs offer clean, renewable energy for those who might otherwise not have the option.

And when the day comes when green power programs can fade into memory because a high-renewables grid has become the affordable, reliable norm, what a day that will be. Few would argue against eating fresh, high-quality, healthy organic produce. Most people turn it down because they don’t want—or can’t afford—to pay extra for it. When it comes to organic electricity, someday, potentially soon, they won’t have to.

Showing 1-2 of 2 comments

February 21, 2014

Peter,Great article!Garfield County is betting its budget on natural gas taxes. However, more renewable electricity--from sunny Western Colorado--could change the equations. Correct? Could price of natural gas be pushed down by more and cheaper wind and solar electricity?Curious how Xcel can grow 11% in a flat market. According to Amory, efficiency gains are keeping energy use growth down. Are they adding customers? Is the growth figure revenue or delivered electricity, or number of customers?

Given the complex dynamics involved, I won't wager a guess as to what would happen to local revenues in Garfield County from natural gas taxes, but I can say this: Amory's correct. Nationally, an economy still rebounding from 2008 and energy efficiency gains have together kept total electricity consumption flat, even slightly declining.

That national trend is true for Colorado specifically. If you look at the most recent US EIA Electric Power Annual, you can see that Colorado's total retail sales of electricity (in millions of kWh) was basically flat, at 53,685 vs. 53,458 in 2012 over 2011 (see http://www.eia.gov/electricity/annual/html/epa_02_08.html). This is particularly notable since Colorado's population is growing about twice as fast as the national average (http://quickfacts.census.gov/qfd/states/08000.html).

Though Xcel Energy doesn't operate exclusively in Colorado, the company's 2013 year end earnings report (http://investors.xcelenergy.com/corporateprofile.aspx?iid=4025308) mirrors the situation in Colorado. For 2013, Xcel's total electricity sales growth was just 0.3%. However, the company's firm natural gas sales rose more than 21%, so it looks like that could at least in part account for Xcel's overall 11% annual growth.